Interisland startup costs weigh on Mesa's profit

The Phoenix-based carrier has started a fare war in Hawaii

Mesa Air Group Inc., whose new Hawaii airline go! has fueled an interisland fare war, said its fiscal second-quarter net income fell 51.3 percent, partly as a result of $1.8 million (see clarification) in startup expenses for the new local operation.

The Phoenix-based carrier, which plans to begin interisland service June 9 with $39 one-way fares, had earnings of $5.3 million, or 14 cents a share, compared with $10.8 million, or 26 cents a share, a year earlier. Mesa also took a $7.5 million charge after converting debt to equity, had a $268,000 gain on the disposition of an aircraft and had $405,000 in net investment losses.

Revenue grew 18.3 percent to $312.1 million from $263.8 million a year earlier, as the carrier added more capacity and showed improved passenger traffic.

Excluding special items, Mesa had pro forma net income of $12.9 million, or 30 cents a share. The earnings per share matched the estimate of six analysts, according to Thomson Financial.

"Given the difficult operating environment and US Airways transition and Hawaii startup expenses, we are pleased with these results," said Jonathan Ornstein, chairman and chief executive of Mesa. "Focusing on cost, our transition and Hawaii startup expenses of $3.6 million for the quarter were within plan."

The company, hoping to survive in Hawaii, where previous startup carriers have failed, has touted the strength of its cash position as showing it can persevere in the state. At the end of last quarter, Mesa had $282.4 million in cash, marketable securities and debt investments, including $11.7 million in restricted cash.

Fuel costs, which have hurt all airlines, soared 58.2 percent to $103.2 million from $65.2 million.

Mesa, which plans to begin service in Hawaii with two 50-seat CRJ-200s and a third in reserve, has twice extended its $39 one-way fare offer, with its current promotion scheduled to end Sunday. Hawaiian Airlines and Aloha Airlines have matched those fares.

Ornstein declined to say yesterday whether the offer would be extended again. However, he said Mesa has been well supported by the state and the community.

"We very much are looking forward to getting started," he said. "We think this will change the face of interisland travel so it will be affordable again. We'll always be there with the lowest fare for people and we think the product will be highly regarded and accepted."

Analyst Ray Neidl of New York-based Calyon Securities said he has taken a "wait-and-see" approach to Mesa's venture into Hawaii due to the history of failed interisland startups in the state.

"It seems Jonathan Ornstein always has a game plan," Neidl said. "We'll have to see if it works."

Earlier this month, Mesa received approval from the state Department of Transportation to operate out of Honolulu Airport's less-expensive commuter terminal after previously being told it would need to fly out of the interisland terminal.

Mesa, which looked at buying Hawaiian and Aloha airlines when those carriers were in bankruptcy, was sued in February by Hawaiian over allegations of using proprietary information gathered through a confidentiality agreement to formulate an interisland business plan. Mesa claimed it didn't do anything wrong and countersued Hawaiian over allegations of violating antitrust law. A hearing is scheduled for next year.

Mesa, which has a fleet of 180 aircraft, operates for major carriers under the names of America West Express, Delta Connection, US Airways Express and United Express. It also flies independently as Mesa Airlines.

The company's total available seat miles, or total air seats multiplied by the total number of miles flown, increased 8 percent last quarter from a year earlier because it grew the size of its regional jet fleet to 144 from 136.

Mesa also operates 36 turboprops and will put an additional 12 into service in early July in support of Delta's expanding operations at its New York-JFK hub.

Mesa's load factor, or the percentage of seats filled, rose 4.3 points to 73.2 percent in the quarter from 68.9 percent a year earlier. Revenue passenger miles, or the total miles flown by paying passengers, increased 14.7 percent to $1.6 billion from $1.4 billion. Its cost per available seat mile, excluding fuel expenses, decreased 1.2 percent to 8.3 cents from 8.4 cents.

CLARIFICATION

Saturday, April 29, 2006

» Clarification: Starting up the new interisland airline go! cost Mesa Air Group Inc. about $1.8 million last quarter. A Page C1 story in Wednesday afternoon's and Thursday morning's editions, based on a quote from a Mesa press release, indicated the startup costs were $3.6 million. The quote, attributed to Jonathan Ornstein, chairman and chief executive, read as follows: "Given the difficult operating environment and US Airways transition and Hawaii startup expenses, we are pleased with these results. Focusing on cost, our transition and Hawaii startup expenses of $3.6 million for the quarter were within plan."